A not-so-hot August

Ouch: investors watched in horror as their portfolios tumbled this week

While you were on holiday… the bull market in China may have ended. That was the talk on Wednesday, with the Shanghai A-share market closing at 2,785. That was 19.2% below the high reached on August 4 of 3,471 – with analysts generally viewing a 20% drop as an indication of a bear market.

It was the first time in two months that the index had closed below 2,800 – a key psychological level. “The 2,800 level is important because it is believed to be the fair valuation of A-shares,” Wang Fen, an analyst with Shanghai Securities told the South China Morning Post.

This week’s drop was precipitous, with stocks falling 5.8% on Monday and a further 4.3% on Wednesday. The trigger for the declines: a curtailing of new bank lending, and a sense that the impact of the government’s stimulus measures may be dwindling. “Some mutual funds have been reducing their holdings as they are pessimistic about the economic outlook,” commented Larry Wan, the deputy chief investment officer of KBC-Goldstate Fund Management. But he adds: “It’s irrational selling that has shattered market confidence.”

However, others think that a correction was overdue. When it hit its August 4 peak, the Shanghai index was up 90.7% this year, worrying some that a bubble was forming.

And China’s equity markets are bubble-prone, in part because a big chunk of the population will happily speculate their life savings when stocks seem hot – a situation that often leads to comparisons between the local stockmarket and the casinos of Macau.

One indicator worth mentioning in this respect is a ranking of China’s most read internet bloggers, which is published by Sina.com. The country’s top five bloggers are – you guessed it – stock pickers and technical analysts. Their blogs have received – in aggregate – about 2.1 billion page views. That incredible statistic speaks volumes about the enormous interest the stock market holds for the average Chinese – many of whom view it as a path to riches. Confirming this view is Shanghai-based Philippe Zhang, the chief investment officer of AXA-SPDB Investment Managers. He told China Daily: “The Chinese market is very trend-oriented because there are many individual investors. That means it can rally very quickly and go down strongly as well.”

All that said, the market remains very firmly in positive territory for the year, and not everyone is reaching for the panic button. South China Morning Post columnist Tom Holland comments: “The sell-off does make some sense. Share prices had clearly lost touch with underlying conditions and were looking overdue for a correction. But investor fears that the mainland authorities will move towards an early exit from the stimulative monetary policy of recent months, whipping the rug from under the stock market’s rally, look premature.”

The performance of stock’s yesterday seems to confirm this assessment. The market rallied 4.53%, erasing some of the week’s earlier losses, finishing at 3,055.

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